Trusts Guide.

Trusts and Inheritance Tax Planning

Trusts are sometimes used for inheritance tax planning, asset protection, or family wealth planning. However, putting an asset into a trust does not automatically mean it will be outside your estate for inheritance tax purposes. The tax treatment will depend on the type of trust, the value of the assets, who benefits, whether you continue to benefit from the assets and how long you live after transferring them.

A trust is a legal arrangement in which trustees hold assets such as money, property, investments, or shares for the benefit of one or more beneficiaries. The trustees are responsible for managing the trust in accordance with the trust deed, the law and the interests of the beneficiaries.

Why Use a Trust?

Trusts can be used for a range of reasons. They may help protect assets for children, provide for a spouse or partner during their lifetime, support a vulnerable beneficiary, manage family wealth, control when beneficiaries receive assets, or address succession planning.

Some people also consider trusts as part of inheritance tax planning. This can be useful in the right circumstances, but the rules are comple,x and professional advice should besoughtn before transferring assets intoa trust.

Trusts and Inheritance Tax

Inheritance tax can apply to trusts in several ways. Depending on the trust and the circumstances, tax may be due when assets are transferred into the trust, on each 10th anniversary of the trust, when assets leave the trust, or when a beneficiary dies.

Many lifetime gifts are covered by the 7-year rule, meaning they may fall outside inheritance tax if the person making the gift survives 7 years. However, HMRC guidance makes clear that the 7-year rule does not apply in the same simple way to all gifts into trust. Some transfers into trust may be immediately chargeable if they exceed available allowances.

Gifts With Reservation of Benefit

If you put an asset into a trust but continue to benefit from it, inheritance tax rules may still treat the asset as part of your estate. This is known as a gift with reservation of benefit.

For example, if you place a property into trust but continue to live in it rent-free, the asset may still be treated as yours for inheritance tax purposes. This is one reason why legal and tax advice is important before using a trust for inheritance tax planning.

Common Types of Trust

There are several types of trust, and the right structure will depend on what you want to achieve.

A bare trust is usually the simplest form of trust. The beneficiary has an immediate right to the trust assets and income, although the trustees hold the assets on their behalf. Bare trusts are often used for children or straightforward family arrangements.

An interest in possession trust gives a beneficiary the right to receive income from the trust, or to use trust property, while the capital may pass to someone else later. For example, a spouse or partner may receive income during their lifetime, with the assets passing to children after their death.

A discretionary trust gives trustees discretion over how and when to distribute income or capital among a class of beneficiaries. This can provide flexibility, but the tax treatment can be more complex and may involve inheritance tax charges.

A mixed trust combines features of different types of trust. Different parts of the trust fund may be treated differently for tax and beneficiary rights.

A vulnerable person trust may provide tax advantages where the beneficiary is a disabled person or a bereaved minor, provided the legal requirements are met. HMRC has specific rules for vulnerable beneficiary trusts.

A non-resident trust involves trustees who are not resident in the UK. These trusts can raise complex tax, reporting and anti-avoidance issues and should not be set up without specialist advice.

Trustees and Their Responsibilities

Trustees have serious legal responsibilities. They must manage the trust assets properly, comply with the trust deed, act in the beneficiaries' interests, keep records, handle tax reporting, and avoid conflicts of interest.

Before appointing trustees, you should make sure they are willing and able to act. Trustees should understand that they may be personally responsible if they act improperly or fail to meet their duties.

Setting Up a Trust

Before setting up a trust, it is sensible to write down what you want the trust to achieve. You should consider who the beneficiaries will be, who should act as trustees, what assets will be placed into the trust, when beneficiaries should receive income or capital, and whether the arrangement fits with your will and wider estate planning.

You should also gather details of your assets, liabilities, existing wills, pensions, life insurance, property ownership and previous gifts. This will help your solicitor and tax adviser assess whether a trust is suitable and what tax consequences may arise.

Getting Legal and Tax Advice

Trusts can be useful, but they are not always the best or simplest option. Other estate planning steps, such as making a will, using exemptions and allowances, life insurance, pension planning or lifetime gifts, may be more suitable depending on your circumstances.

Because trust law and inheritance tax rules are complex, you should take legal and tax advice before transferring assets into trust. Poorly planned trusts can create unexpected tax charges, administrative costs, family disputes or loss of control over assets.

Find a Trusts and Probate Solicitor

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